Report: FTX Workers Knew of Alameda ‘Backdoor’ Long Before Collapse

FTX

A new report sheds more light on FTX’s relationship with sister firm Alameda Research.

In the months leading up to FTX’s collapse, some of its employees uncovered the “backdoor” allegedly used by Alameda to siphon away billions in customer funds from the cryptocurrency exchange, The Wall Street Journal (WSJ) reported Thursday (Oct. 5).

The report, citing sources familiar with the matter, said the workers who made this discovery flagged it with their boss, who informed one of FTX founder Sam Bankman-Fried’s lieutenants.

However, nothing was done. In fact, the head of the team that uncovered the backdoor was fired in the summer of 2022, the report said.

As the WSJ notes, the backdoor is a key piece in the case against Bankman-Fried, who went on trial this week in one of the largest white collar fraud cases in U.S. history. Bankman-Fried, 31, has pleaded not guilty.

“The defendant took billions of dollars in FTX customer deposits from Alameda bank accounts and he spent it — and the customers had no way to know that their money was being used in this way,” federal prosecutor Nathan Rehn told jurors Wednesday (Oct. 4). “When customers thought their money was going into the exchange, they were actually sending their money right into the defendant’s pocket.”

Testifying before the House Financial Services Committee last year, current FTX CEO John J. Ray said that Alameda could move assets from FTX “on an unlimited basis to take positions with other people’s money,” noting also that the company did not perform daily reconciliations.

“FTX was operated as one company,” he told lawmakers. “As a result there is no distinction between the operations of the company and who controlled those operations. We can confirm that user funds were deposited directly into Alameda instead of FTX.”

Prosecutors allege this happened in part because of a special feature Bankman-Fried had ordered programmed in that let Alameda dip into its accounts with impunity. According to the WSJ report, a group of FTX employees uncovered these features last spring.

“Just wanted to point out that there are currently a few places in the … code base where Alameda gets special treatment in one way or another,” Jim Outen, an employee of the FTX-owned Ledger X, wrote in a May 5, 2022 message seen by the WSJ.

His supervisor, LedgerX Chief Risk Officer Julie Schoening, wrote back that “there are less rigid rules” because FTX was based in the Bahamas and not the U.S., and added: “but yea we should clean up this sort of stuff.”

Schoening was later fired, and the WSJ report points to conflicting accounts of why that happened. However, court filings from earlier this year accuse FTX under Bankman-Fried of a pattern of silencing whistleblowers.

Meanwhile, Bankman-Fried’s attorneys argued in their opening statement that the software code allowing Alameda Research to borrow from FTX customers was not a secret and that any “senior developer at FTX” could see it.

Bank of America’s Take on Latin America’s Digital Payments Advantage

Digital payments are growing in Latin America as companies like Mercado Libre and TerraPay rapidly advance digital banking and digital wallets in the region.

Central bank instant payments mandates and modernized infrastructure in Brazil have also moved the needle to the point where the region is arguably moving faster toward digital transformation than anywhere else in the world.

PYMNTS Intelligence’s “How the World Does Digital” report surveyed 67,000 consumers across 11 different countries. It found that Brazil was far ahead of all of them — including the United States — in digital engagement. Drilling down into the results, in 2023, 66.8% of Brazilians used mobile banking apps on their phones at least once a month, and 46.8% used these apps at least weekly.

Consumers in Brazil are embracing digital payments as well. The report found that by 2023, two-thirds of consumers in Brazil had smartphones and 75% had debit cards. In the same year, 77% of consumers in Brazil were using Pix, the instant payments app for mobile phones launched by the country’s central bank.

“After many decades of the status quo in payments, Latin America is going through a major transformation,” Marcelo Moussalli, managing director and Latin America product head executive at Bank of America, told PYMNTS.

That transformation is being driven by the two largest economies in the region — Brazil and Mexico — representing roughly two-thirds of the total GDP of Latin America, he said. Regulators in those countries launched new payments initiatives aimed at modernizing their respective banking systems.

The top-down, mandate-driven approach has been focused on boosting competition while lowering transaction costs, increasing transaction security and fostering wider financial inclusion. Beyond the commonality of the goals, the governments in Brazil and Mexico took different approaches to get there.

Similar Goals, Differing Approaches

Brazil, for its part, introduced the Pix real-time payments network. Mexico’s innovations have included a peer-to-peer (P2P) network and a digital collection capability underpinned by QR code technology.

“In both countries, these innovations are improving [payments] speed, visibility and the overall user experience,” Moussalli said.

Against that backdrop, the adoption of real-time rails and new payment modalities has, in some cases, exceeded expectations, but there is still a robust greenfield opportunity, he said.

By way of example, in 2020, Pix’s first year, the network captured 16% of Brazil’s electronic payments volumes; that tally has grown to 40% as recently as this year. Mexico’s real-time payments network has grown 6% year on year as measured in 2024, with 60 million individuals using the network, although the QR codes and P2P networks have notched less adoption than originally anticipated.

The trend is inexorable, however. Although some businesses have been hesitant to pivot more fully to these new payment modalities and may cling to traditional methods such as cash, as time goes on, “it’s going to be hard to do business in Mexico or Brazil” without connecting to these rails, Moussalli said.

“They’re going to miss out on opportunities if they don’t adopt new digital payment options,” he said.

That’s especially true in commercial payments, where suppliers will increasingly demand to be paid in real time.

Asked by PYMNTS about how traditional financial institutions can help enterprise clients embrace change, Moussalli said Bank of America launched support for QR codes, which clients can access through the CashPro banking platform. Clients scan codes from paper or electronic invoices, and within seconds the platform retrieves the invoice details from the beneficiary bank and displays those details for review and confirmation of payment.

“This dramatically speeds up the payments process” beyond the confines of paying suppliers and into the realm, for example, of mandatory transactions that companies make for employees’ retirement benefits, Moussalli said. That “helps eliminate bureaucracy in processing payments.”

The feature has been so well-received in Brazil that it is being explored for use in Europe, he said.

Although regulators initially drove innovation in financial services in Brazil and Mexico, the central banks are well connected to their respective markets and are working with banks and merchants to foster the shift to digital transactions, Moussalli said. Cash withdrawals from banks have plummeted in the double digits. There’s particular promise in pivoting to digital payments in Mexico where cash is still tied to 85% of all retail transactions, especially for transactions below the U.S. dollar equivalent of $50.

“The impact of these changes is ongoing,” said Moussalli, adding, “there’s no going back.”